Part 1 of my Estate Planning series will go over the types of assets that pass through a Will and which assets do not have to pass through a Will.

It isn’t uncommon for people to think that every asset passes through their Will and therefore needs to be added to their Will, but this is not the case, and it may actually save some money for your estate if the asset doesn’t. In this article I am going to discuss the assets that pass through a Will and assets that do not have to pass through a Will. Bear in mind that anything that passes through a Will is subject to probate. Probate is a process through the provincial courts that verifies that a will is real and is the most up to date version. The cost of probate in British Columbia can be estimated to be around 1.4%, meaning that anything that passes through a will is subject to this cost. Income tax may also be a concern too but this depends on the type of asset or type of account.

Non-Registered Investment Accounts / Bank Accounts : If these accounts are solely owned then they will pass according to the account owner’s Will and be subject to probate. Alternatively, these accounts may be set up as Joint with Rights of Survivorship, which would result in the account becoming the sole property of the remaining account holder(s). Joint accounts are not subject to probate costs as they do not pass according to a Will.

Real Estate : If it is solely owned then it will pass according to your Will and will be subject to probate. Real estate can be a jointly owned asset too. Jointly owned real estate may be set up as Joint with Rights of Survivorship, which means that the remaining account holders will take over the deceased owner’s portion. Jointly owned real estate can also be set up as Tenancy in Common, which means that the portion owned by the deceased will pass through the deceased’s will to their heirs and will be subject to probate. If the real estate is solely owned or is set up as tenancy in common then there will also be income tax that will need to be paid by the estate, but only if the property does not qualify for Canada’s coveted Principal Residence Designation.

Art, Collectibles, & Antiques : These unique assets will pass according to the deceased’s Will and will be subject to probate based on their estimated value. This classification of items is known as “personal use property” and income tax in the form of capital gains or losses will also have to be taken into consideration. Under income tax law, you are assumed to have ‘sold’ these types of assets at fair market value the day before you pass away, and the difference between your accrued cost basis and the estimated fair market value will be included as a capital gain or loss on your terminal tax return. I’ll add that this classification of assets can cause a lot of chaos between estate beneficiaries if the Will is not specific as to whom you would like to give the individual pieces to or if you wish for them to be sold by the executor and the proceeds dispersed to the beneficiaries of the Will. There may be a high emotional value or a high actual monetary value attached to these types of assets and it isn’t uncommon for these types of assets to lead to arguments among family members. The deceased’s instructions should be very clear as to the handling of these types of assets.

Tax Free Savings Accounts (TFSA) : These accounts have the option of passing through a will by listing the estate as the beneficiary or the account owner can list a specific beneficiary or beneficiaries. The benefit of naming a specific beneficiary is that it protects this account from probate costs and, usually, the TFSA will be one of the first accounts provided to a beneficiary or beneficiaries because it is not subject to any income tax either. If a spouse is the only listed beneficiary of a TFSA then there is the option of successor-holder beneficiary, which means that the living spouse would simply become the owner of this TFSA if one spouse passes away. This avoids the requirement of having to liquidate the account prior to passing along the proceeds. Another benefit of adding a spouse as successor-holder is that they will essentially dissolve the value of the TFSA into their own without having to worry about the normal TFSA contribution limits.

Registered Accounts (RRSP, LIRA) : Similar to a TFSA, these accounts have the option of passing through a will by listing the estate as a beneficiary or you can name a specific beneficiary or beneficiaries directly. The benefit of naming a specific beneficiary is that the account is protected from probate costs but the deceased’s estate will still have to pay the income tax on the balance of these accounts. The account will be liquidated by the executor, the estate tax will be paid on the deceased’s terminal tax return, and then the proceeds will be dispersed to any beneficiary or beneficiaries.

Registered Income Accounts (RRIF, LIF) : These accounts are the same as the TFSA, meaning that a specific beneficiary or beneficiaries can be listed or the estate can be listed as the beneficiary and a will specifies whom the proceeds will go to. If a spouse is the only listed beneficiary then there is the option of a successor-holder beneficiary, which means that the remaining spouse would simply become the owner of this account if one spouse passed away. This avoids the requirement of having to liquidate the account prior to awarding it to the living spouse and this also bypasses any income tax. The estate will have to pay the income tax on this account if anyone except the spouse is listed as the beneficiary.

Creating an efficient estate plan is no easy task and time should be allocated to ensure that your estate plan matches your wishes. What would be the point of deferring the enjoyment that your assets can provide to your heirs if CRA is simply going to be take half (based on British Columbia’s highest marginal tax rate of 53.5%)?

Want some help developing your Estate plan? Reach out to me at info@financerx.ca.